Appeals Court Rules onBPA Rate Setting, Fish Costs

by Staff
Columbia Basin Energy Report, May 4, 2007

Federal court opinions rendered Thursday faulted the Bonneville Power Administration for a decision in 2000 that saddled its "preference customers" with costs incurred via an agreement with investor-owned utilities, and by establishing fiscal year 2002-2006 rates with fish and wildlife cost estimates that were "not supported by substantial evidence."

The U.S. Court of Appeals for the Ninth Circuit did side with the federal agency on a separate issue, saying that "BPA acted lawfully when it allocated to its preference customers part of the cost of acquiring power to serve its direct-service industrial customers."

"The Bonneville Power Administration is disappointed in the Ninth Circuit Court's decisions," according to spokesman Mike Hansen. "While we haven't had time to fully review and analyze the rulings, we are concerned the opinions will have a detrimental impact on BPA's ability to provide long-term certainty to the region concerning the benefits BPA provides because it will make settlements more difficult."

Hansen said the agency has not yet decided whether or not to request a rehearing in the Ninth Circuit on the issues.

"As for the allegations in the Golden Northwest suit that BPA was not setting rates sufficient to recover fish costs, it turned out that, in fact, rates were sufficient and did recover fish costs," Hansen said of the turn of events during the rate period addressed in the Ninth Circuit opinion.

The two Ninth Circuit opinions answer petitions from a host of Northwest utilities and power user groups and from the Confederated Tribes of the Umatilla Indian Reservation and the Yakima Nation.

The Northwest Power Act requires entities to petition the appellate court directly for review of BPA actions perceived to be in violation of the act. BPA markets power generated in the federal Columbia/Snake power system and, overall, about 40 percent of the electricity consumed in the Pacific Northwest. The power is produced at 31 federal dams in the Northwest and one nuclear plant and is sold to more than 140 Northwest utilities.

The 1980 act requires Bonneville to provide power from the hydrosystem to the Northwest's publicly owned utilities at cost, which includes expenditures for fish and wildlife affected by the construction and operation of the system. The federal power marketing agency also tries to accommodate the needs of investor-owned utilities and direct services industries, such as the aluminum industry.

As a federal agency, BPA additionally has funding obligations stemming from hydrosystem effects on species, such as salmon and steelhead, that are listed under the Endangered Species Act.

Tribal officials said they were heartened by one of Thursday's Ninth Circuit opinions, which said, "… we agree with the Tribes that BPA failed to impose rates designed to recover its true fish and wildlife costs" and that "It should have been apparent to BPA that its 1998 cost estimates were too low…."

"This is a real vindication for the tribes' hard work in the development and implementation of the Northwest Power Act," Yakama Nation attorney Tim Weaver said in a statement released by the tribes.

"The Yakama Nation looks forward to assisting BPA in determining an appropriate rate structure now that the court has provided us with this direction," Weaver said.

"We have direction from the courts, once again, that the BPA and the federal government must heed the advice of the tribes and states while working together for salmon restoration," said Jay Minthorn, chairman of the Umatilla Tribe's fish and wildlife commission.

One of Thursday's Ninth Circuit opinions consolidates petitions that challenge BPA rate decisions on a trio of issues.

-- The Public Generating Pool and Pacific Northwest Generating Cooperative petition said that BPA wrongly shifted onto its preference customers the costs of supplying power to its direct-service industrial customers.

-- A Western Public Agencies Group, Public Power Council, and Public Utility District No. 1 of Grays Harbor argue that BPA shifted onto its preference customers the costs of settling its obligations to its investor-owned utility customers.

-- The tribes claimed that the 2002-2006 rates were not sufficient to satisfy BPA's fish and wildlife obligations.

Public Power Council Executive Director Scott Corwin said his organization had yet to "dissect" the new Ninth Circuit opinion, but that one message was clear - resident exchange costs can not be passed on to public utilities.

"That's certainly an important positive step," Corwin said. Less clear, he said are the implications of the opinion on BPA fish and wildlife cost assessments.

Corwin sad that he though BPA "did a very thorough job" analyzing and estimating fish and wildlife costs for the 2002-2006 rate period.

A separate opinion issued May 3 addresses petitions from publicly owned utilities operating in the region and Intervenor Industrial Customers of Northwest Utilities. Those petitions asked for a review of the same issue put forth by the public utilities in the other petitions - the legality of settlement agreements in 2000 with six investor-owned utilities regarding "residential exchange program" costs.

An opinion penned by Ninth Circuit Judge William A. Fletcher said that "BPA acted lawfully when it allocated to its preference customers part of the cost of acquiring power to serve its direct-service industrial customers."

But the three-judge panel that includes Judges Stephen Reinhardt and Jay S. Bybee decided that, "… consistent with our decision in a companion case filed at the same time as this one, we hold that BPA acted contrary to law when it allocated to its preference customers part of the cost of the settlement BPA reached with its investor-owned utility customers.

"We also hold that BPA's fish and wildlife cost estimates and, by extension, the rates based on those estimates, are not supported by substantial evidence."

The opinion notes that BPA conducted a public process that led to the development in 1998 of the "Fish and Wildlife Funding Principles" (the "Principles"), which included thirteen alternatives for carrying out BPA's fish and wildlife obligations.

"Each alternative had its own projected cost. Because 'final decisions and approvals on a fish and wildlife recovery strategy' had not been made when the WP-02 proceeding began, BPA decided to rely on all thirteen alternatives as a way of 'keep[ing] [its] options open.' BPA explained that it would 'treat the alternatives as if each [was] equally likely to occur," Fletcher wrote. That initial range of alternatives were estimated to cost from $100 million to $179 million per year.

"The problem is that BPA adhered to the 1998 cost estimates -- and to the assumption that each of the thirteen alternatives were equally likely to be implemented -- long after subsequent events revealed their significant shortcomings," Fletcher wrote of a rate case process that began in 1998, concluded, and was reopened for a supplementary process.

The tribes contended that the rate case did not properly account for fish and wildlife costs, a fact they said would cause BPA shortfalls in other areas, such as its obligation to repay debt to the U.S. Treasury.

Confounding factors occurring during the processes included power market volatility in 2000 that caused BPA to declare a financial emergency and a U.S. District Court decision that would seem to impose additional fish and wildlife costs on the agency, the Ninth Circuit said.

"Third, and perhaps most significantly, the government issued a Biological Opinion in December 2000 describing what fish and wildlife actions would be necessary pursuant to the ESA," Fletcher wrote.

"Despite signing a Memorandum of Understanding indicating that it would implement the Biological Opinion, and despite new projections from fisheries managers that BPA had underestimated its fish and wildlife costs by more than $300 million per year, BPA did not retreat from its prior calculations," the opinion said.

"Although we understand that the WP-02 rate case was not the forum for making decisions regarding which fish and wildlife alternative to implement, BPA was nevertheless required to develop a realistic projection of fish and wildlife costs that accurately reflected the information available at the time the rates were set and the cost recovery mechanisms adopted," Fletcher said.

In the companion case, Portland General Electric vs. BPA, Bybee said that the same Ninth Circuit panel, recognized "that BPA has broad authority to settle claims under the NWPA."

The Residential Exchange Program created by the NWPA granted non-preference utilities access to low cost federal power, while still maintaining the preferred status of BPA's traditional preference customers.

Bybee wrote, "BPA's settlement does not resemble the REP program created in sec. 5(c) and 7(b) that it purports to be settling. Rather, BPA created a new residential exchange benefit system under sec. 2(f) that better suited BPA's goals. BPA's actions conflict with its governing statutes and regulations and are, accordingly, 'not in accordance with law.'"

Bybee concluded that "BPA proceeded from a flawed legal premise about its settlement authority, and its defense of the settlement as consistent with the NWPA appears to be post-hoc rationalization for BPA insisting on greater flexibility in designing a REP program than Congress was willing to give it.

"Congress ordained one system; BPA appears to prefer another. In saying this, we do not impugn BPA's motives or its business judgment. BPA itself has written that as 'a result of the implementation of the directives of the Northwest Power Act,' 'different customer classes may receive greater or lesser benefits. . . .'

"While it is unfortunate that some customer classes may receive greater benefits than other customer classes, BPA cannot unilaterally change the law.

"Yet, it appears to us that, in an effort to spread its relatively cheap power across
the Pacific Northwest, BPA has done precisely that," Bybee said.

The Fletcher opinion concluded with the panel's directive of a "remand to BPA to set rates in accordance with" the panel's decision.